*1985 1. Petitioner purchased certain stock in 1916 and 1917, which stock became worthless in 1922. Petitioner did not have knowledge of the worthlessness of the stock until 1924, when he sold it for one dollar. Held, the loss resulting therefrom was sustained in 1922 and not in 1924.
2. Upon the evidence, held, petitioner was ergularly operating a trade or business.
3. Amount of "net loss" for 1922 determined and applied against the net income for the years 1923 and 1924.
*1029 This proceeding is for the redetermination of deficiencies in income tax for the calendar years 1924 and 1925, in the amounts of $835.07 and $858.67, respectively.
Two issues are presented: (1) The determination of the year in which petitioner sustained a recognized loss of his investment of $30,365.37 in preferred stock of the American Cities Co., and (2) whether petitioner was engaged in the "operation of a trade or business regularly carried on by the taxpayer" as that term is used in the "net loss" provisions of the Revenue Acts of 1921, 1924, and 1926.
*1986 FINDINGS OF FACT.
Petitioner is an individual and a citizen of the United States, with his residence at New Orleans, La.
During the years 1916 and 1917, petitioner purchased 600 shares of preferred stock in the American Cities Co., a corporation, at a total cost of $30,365.37. During the year 1922 the corporation became hopelessly insolvent and petitioner's stock in the corporation *1030 became absolutely worthless. Petitioner had no official connection with the American Cities Co. and did not become acquainted with its condition of affairs until the spring of 1924, at which time petitioner sold his 600 shares for the nominal consideration of $1.
On his income-tax return for the year 1924 petitioner deducted as a "Loss on American Cities Co. Preferred Stock $30,364.37," as representing the difference between the cost of such stock and its selling price. He also reported for the year 1924 a gross income of $33,990.45, and deductions other than the $30,364.37 loss in the amount of $10,785.81, or a net loss for the year of $7,159.73, which net loss he deducted from his net income for the following year 1925. The respondent determined that the loss of the petitioner's*1987 investment in the American Cities Co. was sustained in the year 1922, when the stock in that company became worthless, and disallowed the deduction for the year 1924, thereby determining petitioner's net income for that year to be $23,204.64. The respondent also disallowed, as a deduction from the net income for the year 1925, the reported net loss of $7,159.73 for the year 1924, since respondent had determined that petitioner had a net income for the year 1924, instead of a net loss.
Petitioner was admitted to the bar in Alabama in the year 1885, but has not undertaken the practice of law since the year 1887. Since 1912 petitioner has derived his income principally from buying and selling real estate, stocks and bonds, underwriting, and lending money. For the past 15 or 16 years, he has maintained an office in the city of New Orleans, and has kept his own books. He employed a stenographer. His transactions from which he derived income, numbered approximately from 15 to 25 a year, and during the past 15 years, amounted to something over a million and a half dollars. The items of income and deductions reported by petitioner on his income-tax returns for the years 1922 and 1923*1988 are as follows:
| 1922 | 1923 | |
| INCOME | ||
| Income from business or profession | $2,280.00 | $950.00 |
| Interest on bank deposits, notes, etc | 3,746.47 | 4,130.03 |
| Dividends on stock of domestic corporations | 6,708.00 | 7,135.00 |
| Taxes paid at source | 74.80 | 72.80 |
| Profit from sale of real estate | 1,102.70 | |
| Total income | 12,809.27 | 13,390.53 |
| DEDUCTIONS | ||
| Interest paid | 2,061.72 | 2,054.36 |
| Taxes paid | 1,667.87 | 1,015.87 |
| Contributions | 681.00 | 570.00 |
| War taxes paid | 60.50 | 58.03 |
| Office rent and office expenses | 554.00 | 560.00 |
| Bad debts | 25.00 | |
| Total deductions | 5,025.09 | 4,283.26 |
| Net income reported | 7,784.18 | 9,107.27 |
*1031 OPINION.
LOVE: In connection with the first issue mentioned in our preliminary statement above, petitioner contends that he sustained a loss of $30,364.37 in 1924, when he sold 600 shares of preferred stock of the American Cities Co. for the nominal consideration of $1. He had purchased the stock during 1916 and 1917, at a total cost of $30,365.37. Petitioner frankly admits that the stock became absolutely worthless during the year 1922. But he contends that since he did not have knowledge of such worthlessness until 1924, he did not*1989 sustain any loss therefrom until he sold it in the latter year. Section 214 of the Revenue Acts of 1921 and 1924 allows individuals to deduct from gross income under certain circumstances "Losses sustained during the taxable year * * *." The question then is, when did petitioner "sustain" his loss. Was it when the stock became worthless in 1922, or when he first knew of its worthlessness in 1924, at which time he sold it for a nominal consideration? In ; affd., C.C.A., 2d. Cir., ; certiorari denied, , it was held "that if the proof shows stock became worthless in a given year, the deduction must be taken for that year and may not be taken for any other year." Petitioner's contention on this point is, therefore, denied.
Regarding the second and alternative issue, petitioner contends that he should be given the benefit of section 206(e) of the Revenue Act of 1924, which provides that:
If for the taxable year 1922 a taxpayer sustained a net loss in excess of his net income for the taxable year 1923 (such net loss and net income being computed under the Revenue Act of*1990 1921), the amount of such excess shall be allowed as a deduction in computing net income for the taxable year 1924 in accordance with the method provided in subdivisions (b) and (c) of this section.
The applicable provision of the Revenue Act of 1921 is section resulting from the operation of any trade or business regularly carried on by the taxpayer (including losses sustained from the sale or other disposition of real estate, machinery, and other capital assets, used in the conduct of such trade or business); and when so resulting means the excess of the deductions allowed by section 214 or 234, as the case may be, over the sum of the following: (1) the gross income of the taxpayer for the taxable year, (2) the amount by which the interest received free from taxation under this title exceeds so much of the interest paid or accrued within the taxable year on indebtedness as is not permitted to be deducted by paragraph (2) of subdivision (a) of section 234, (3) the amount by which the deductible losses not sustained in such trade or business exceed the taxable gains or profits not derived from such trade or business, (4) amounts received as dividends and allowed as a deduction *1991 *1032 under paragraph (6) of subdivision (a) of section 234, and (5) so much of the depletion deduction allowed with respect to any mine, oil or gas well as is based upon discovery value in lieu of cost.
The respondent argues that petitioner's contentions under this issue should be denied, for the reason that the evidence is not sufficient to show that petitioner was regularly carrying on a trade or business within the meaning of the statute. The evidence shows that since 1912 petitioner has derived his income principally from buying and selling real estate, stocks and bonds, underwriting, and lending money; that he entered into from 15 to 25 such transactions annually; that for the past 15 or 16 years he has maintained an office in New Orleans; and that during this time the gross amount of business done was something over a million and a half dollars. Under such conditions, we think it can be said, and we so hold, that the above described activities constituted the operation of a trade or business regularly carried on by the petitioner. *1992 ; ; ; ; ; and .
It only remains for us to determine the amount of the net loss for the year 1922, computed under the provisions of section 204(a), supra. The evidence does not show whether the interest and taxes paid during 1922 were in connection with petitioner's business. In the absence of such evidence, we must hold they were not. The "net loss" for 1922 is, therefore, the amount of $18,110.10, computed as follows:
| Loss on American Cities Co. stock | $30,365.37 |
| Office rent and office expenses | 554.00 |
| 30,919.37 | |
| Less: Gross income | 12,809.27 |
| Net loss | 18,110.10 |
See .
The net loss of $18,110.10 is $9,002.83 in excess of petitioner's net income for the taxable year 1923. It follows that, under the provisions of section 206(e) of the Revenue Act of 1924, supra, the amount of $9,002.83 should be allowed as a deduction in computing*1993 the net income for the taxable year 1924. The deficiency for the year 1924 should be redetermined accordingly. Since petitioner had no net loss for the year 1924, the respondent's determination with respect to the year 1925, is approved.
Judgment will be entered under Rule 50.